The Biggest Financing Mistake Startups Make

By davelavinsky

Created 09/26/2012 - 01:36

This is arguably the worst small business financing strategy:

The entrepreneur develops what they believe to be a sure-fire business plan that can't fail. Then, unable to locate any form of startup capital (because they haven't invested in learning how to find capital), they start their business with credit cards as the only source of financing, and an expectation of sustainable business results within 3 to 6 months.

If everything goes well, the credit card debt will be retired within a year and funds will start building in the bank account. Sounds good, right?

But, have you ever spoken to someone who runs a successful small business; perhaps one that's been around for 5 or 10 years? If you take the time to ask one of these entrepreneurs about their startup period, what you learn may shock you.

Even some of the most successful small and medium sized businesses out there today had some questionable moments making a go of it in the beginning - which can sometimes last for several years.

The point here is simply this:

The process of getting a business operating and successful can take many unexpected twists and turns, no matter how diligent you are in creating a thorough business plan and business financing strategy.

Therefore, to increase your probability for success you need to allow for the unknown, the unplanned, and the unfair.

A business financing strategy that cannot accommodate unforeseen events is not much of a strategy. Furthermore, a business financing strategy that is based on high interest credit cards that can destroy both your cash flow and your personal credit is also not much of a strategy.

To improve your odds of small business success, here are some tips for developing a solid business financing strategy.

Invest Your Own Cash

If you have some of your own cash included in your business financing strategy, it will immediately increase your likelihood of getting other kinds of startup funding.

The more "skin" you have in the game, the more interested a lender will be in approving your loan request. Plus, most angel investors will be more impressed and eager to fund knowing you have some of your personal savings invested.

There is also something to be said about the psychological incentive of losing your own money and the motivation it creates for you to work harder to keep it.Create Contingencies in Your Cash Flow

Whatever you estimate your working capital requirement to be, double it. Things can and will go wrong. So make sure you don't run out of funding when they do.Use Credit Cards Wisely

Used properly, credit cards can be the cheapest form of working capital you have at your disposal. They can cover gaps in cash flow, or they can be used to fund endeavors that should result in a fast payback. But carry a large balance for a long time and the interest and payments will be way too much.

Some business credit cards provide 30-90 days of interest-free financing. If you pay off the entire balance every month, you have an extremely low cost of working capital financing.

But if you start carrying large balances without paying them down monthly, you will go from the cheapest source of working capital to one of the most expensive, and you will likely also hurt your credit rating in the process (lenders like to see your balance being less than half of your available limit).Watch Spending Closely At Startup

One of the things you can control early on is how much you spend and what you spend it on.

This will change in time, but if you can spend wisely in the beginning you may be able to avoid a cost cutting exercise further down the line. For example, if you spend too much for an office lease early on, you may have to make the painful and expensive decision to downsize your space later.

While it's normally true that you have to spend money to make money, you can still be smart about the spending process. Be most cautious about your purchases in the beginning when funds are the scarcest. Always negotiate a better deal with vendors and delay anything expensive until you can justify it later on.

With these financing tips in mind, get out there and make those sales. Build a track record of success that you can show an investor while maintaining a positive cash flow throughout.

Suggested Resource: Want funding for your business? Then check out our Truth About Funding[1] program to learn how you can access the 41 sources of funding available to entrepreneurs like you. Click here to learn more[1].